US to move into ‘rate-cut mode’: ACI

Yasmine Raso

Senior Journalist, Financial Newswire

22 May 2023

American Century Investments’ (ACI’s) global fixed income co-Chief Investment Officer (CIO), Charles Tan, has become the latest in a string of investment experts to forecast the US Federal Reserve’s (US Fed’s) concluding its tightening cycle.

Tan said considering the impending economic slowdown and persistent fallout of the strained banking industry the central bank is expected to move into “rate-cut mode” before the year is over.

“It’s important to note that at its current range, the Fed’s short-term rate target is finally higher than the annual headline inflation rate,” he said.

“In hiking cycles dating back to 1973, the Fed has never stopped raising rates until the federal funds rate exceeded the inflation rate.”

Tan also urged investors to remain cautious. As one of the fastest rate-hiking cycles in the last four decades has delivered attractive returns, the tides may soon be turning on investments in savings accounts, Treasury bills, cash deposits and other products.

“The dynamic between historical short-term rates and recessions suggests that investors holding cash equivalents still have time to potentially manage reinvestment risk. This refers to the inability to reinvest cash flows at a rate comparable to your current rate of return,” co-CIO for global fixed income, John Lovito said.

“In a recession, it’s all about quality in fixed income and we believe higher-quality bonds with attractive yields – including US Treasuries and higher-credit-quality corporate and securitised bonds – may help investors weather tough times.

“It’s also important to remember that attractive investment opportunities often emerge during market unrest.”